Send a Comment

First FOMC Meeting of 2012

01/20/2012

The first Federal Open Market Committee (FOMC) meeting will be held next week. The all-important statement will be released on Wednesday, January 25, at 12:30 p.m., to be followed by a 2:15 p.m. press conference by Fed Chairman Ben Bernanke. Similar to 2011, there will be eight FOMC meetings in 2012; four of these meetings will include a press conference by Chairman Bernanke.

The FOMC’s ten voting members begin the year with the federal funds rate still at .25% and a discount rate of .75%. Growth continues to be the policy concern. The Fed has a forecast for 2012 of 8.6% for Unemployment, 1.70% for CPI, and 2.70% for GDP.

At the last meeting in December, nine members voted in favor of the statement which included the critical language, “exceptionally low levels for the federal funds rate at least through mid-2013.” The lone dissenter was Chicago Fed President Charles Evans.

The January meeting will also be the first for the newly reshuffled ten voting members. Dallas Fed President Richard Fisher, Philadelphia Fed President Charles Plosser, Chicago's Charles Evans, and Minneapolis's Narayana Kocherlakota will no longer vote. Keep in mind that back in September, Fisher, Plosser, and Kocherlakota all dissented and voted against further easing.

The new voting members are Cleveland's Sandra Pianalto, Richmond's Jeffrey Lacker, Atlanta's Dennis Lockhart, and San Francisco's John Williams. Lacker is already on record that he does not believe further easing will help the economy. The other three new voting members have not telegraphed their belief for further easing.

MY EXPECTATION:

The fed funds rate has had a target of zero to 0.25% since December 2008. Additionally, two rounds of aggressive asset purchases (quantitative easing) have lifted asset prices while expanding the Fed’s balance sheet. In mid-2011, I wrote that implementation of another round of quantitative easing (QE3) would be a bearish event for risk assets. I firmly stand behind that today.

When the U.S. implemented QE2 in late 2010, it created inflationary pressures in several emerging economies. The costs for food, energy, and raw materials rose uncomfortably. The response was monetary tightening, most specifically in China, a much needed source of global growth. In fact, growth did slow, and global risk assets suffered from that point on.

If further monetary easing is needed, I expect it will come in two forms: from the People’s Bank of China via lowered interest rates, and from the U.S. via support for the mortgage market. My ideal scenario would be just monetary easing in China; let their central bank do the heavy lifting. Global risk asset prices would rise.

Ultimately, the 10-year Treasury will telegraph whether another round of QE is coming. Based on this week’s price action, I expect the 10-year sees it my way. No need for QE3; in fact, let’s start thinking about when we might telegraph a policy shift.

If we want people to buy houses, the best motivator would be to announce that on “X “ date, rates will rise. We all might be surprised how quickly “wait and see” buyers rush off the sidelines.

NO QE3! At least not at the January meeting. . . .

Year-to-Date 10-Year U.S. Treasury Yield

Source: Bloomberg

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.